In its latest detailed analysis of the North American gold and silver markets and stock recommendations, Bank of America Merrill Lynch (BoAML) is bullish (well perhaps only marginally so) on gold and silver prices coming up with forecasts for gold of an average price of $1,232 an ounce this year (average price to date is $1,212) and $1,293 an ounce next. For silver they are looking for an average price of only $16.47 this year and $18.43 next, although their longer term forecast is only $17 - confirming the conservative outlook on prices prevalent with nearly all bank analysts.
But caution on metals prices can be a positive on selecting mining and related stocks to invest in. Those that can do well at conservative prices should be able to weather a metal price downturn should one occur and are thus less risky overall.
BoAML analyst's picks are Goldcorp (NYSE:GG) as their top senior gold mining stock, Agnico Eagle (NYSE:AEM) as the best mid-tier stock and Semafo as their top choice among intermediate producers. They are also keen on Royalty/Streaming stocks picking all three of Silver Wheaton (NYSE:SLW), Franco Nevada (NYSE:FNV) and Royal Gold (NASDAQ:RGLD) as buys. They also mention Kinross Gold (NYSE:KGC) and Tahoe Resources (NYSE:TAHO) positively as well. They see Barrick Gold (NYSE:ABX), Newmont (NYSE:NEM), Yamana (NYSE:AUY) and New Gold (NYSEMKT:NGD) as neutral.
There has been quite a transformation in the fortunes (and the stock prices) of the North American gold producers along with the rise in the gold price so far this year, and the increases to date suggest that the producers were hugely oversold in the five year gold price downturn. The miners had, though, nearly all been guilty of overstretching themselves in terms of capital programs, and had mostly let costs get ahead of themselves in the heady days when gold seemed to be moving ever-higher, egged on by their institutional investors and gung-ho management teams going for growth. But the price downturn hugely changed the situation and most of the major gold producers responded with a bloodbath of their CEOs, nearly all of whom have been replaced in the past few years. A more cautious approach has seen huge write-downs in debt, capital programs being put on hold, or cancelled altogether, exploration being curtailed and a renewed emphasis on bringing down operating costs. Some think that they may have gone too far in cutting some of the programs, but others, including the big cutbacks seen in General and Administrative costs will have been well worthwhile.
However some other factors have worked in their favor, particularly in respect of operating margins. The big fall in oil prices has been hugely important and those companies with offshore operations have for the most part benefited strongly in local terms from a strong dollar bringing local costs down in dollar terms, while revenues are received in dollars. Overall nearly all the companies have succeeded in bringing down all-in sustaining costs (AISC) to sustainable levels, while debt margins have been reduced substantially.
It is perhaps worth commenting, though, that the senior producers in particular have mostly made some very substantial price gains already this year. See my article - Billionaires, Gold And Gold Stocks... They Are In For The Long Term, Should You Be Too? - which, among other things tabulates the performance of the senior North American gold mining stocks for the first five months of the year. Interestingly the BoAML top gold stock selection is one which underperformed its peers over this period, but could now be ripe for a stronger upwards move. As the analysts note Goldcorp's new CEO Dave Garofalo is focused on growing NAV per share through reducing costs, pushing ahead with the internal project pipeline and investments in junior miners - which has already started with the acquisition of Kaminak ostensibly to fill a gap in the company's production schedule in a low-political risk location. Garofalo will be keen to prove himself at Goldcorp given his tenure at Hudbay had some difficult moments. If the gold price continues to move positively he may be timing things well in his new position.
It is interesting perhaps that the BoAML analysts have come up with buy recommendation on the three biggest North American streaming/royalty companies. These certainly outperformed gold mining stocks during the downturn, although are unlikely to outperform on the upside. They do, however, tend to be lower risk assets than the operating miners themselves. There is a degree of safety in their recommendation - and that should not go unnoticed by investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.